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Nadella’s Handbook for Microsoft Success

By John Carenza - Feb 13, 2014 at 11:45PM

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With new leadership comes hope for Microsoft investors.

Let's face it. Microsoft (MSFT -0.92%) has become the runt of the consumer-electronic litter, which includes the alphas Google (GOOGL -0.14%) and Apple (AAPL -0.29%). While the PC-based company continues to generate steady profit, stagnation has become an issue, especially in light of competitor's success. 

Since March 2012, Apple's iPhone sales alone have been worth more than all of Microsoft. It would seem a foreboding sign that the Apple product created just five years ago is now more profitable than the whole of Microsoft. Furthermore, according to an NDP group study, a 9.6% share of all desktops, tablets, and laptops belong to Google's Chromebook. However, with investors leaning toward Google and Apple and new CEO Satya Nadella outlining an aggressive strategy, the time to invest in Microsoft may be now.  Look for Nadella to implement resourcefulness in the battlefronts of gaming systems, desktop operating systems, and smartphone technology. 

Why Satya Nadella?
A 22-year Microsoft veteran, Nadella started as a program director within the Windows Developer Relations group. He swiftly rose to vital systems within the company, including its Bing search engine director and most recently president of Microsoft Server and Tools Business, a $19 billion subdivision. Nadella is Microsoft's Midas; its 2013 second-quarter report shows that Microsoft's cloud services revenue increased 107% under his direction.   

Let's assume (a big assumption, I know) that such growth projects to Microsoft as a whole. The Redmond, Washington behemoth would pull in $26.24 billion next quarter, which is about $10 billion more than Google is projected to earn.  Assuming he can build upon past achievement, expect steady growth within Microsoft as Nadella finds his feet.    

While CEO Nadella seems to be the right candidate, assuming that an executive will make the right business decisions is like winter forecasting in the Snow Belt.  Rather than blindly purchasing Microsoft shares, use the following three measures to gauge the financial potential initiated by Satya Nadella. 

1.)     If Microsoft's most recent purchase, Nokia, is finalized then Microsoft will become more competitive in current Smartphone crusades. 

The Microsoft brand smartphone, Windows Phone (3.3% market share) is the No. 3 seller in smartphone software, behind (who else?) Google's Android (79%) and Apple's iOS (14.2%). At the conclusion of the next financial quarter, check these numbers. Any significant upward movement in Windows phone revenue could be signs of a shift in power initiated by Nokia.

2.)     If Nadella discontinues the Xbox console, then Microsoft will experience massive consumer falloff.  

Nadella has championed the idiom, "renew or die." If he applies such a stance to the mega-popular gaming system then Microsoft generates major competitive leverage. Remember, Apple and Google are not competitors on the gaming front. Therefore, it is vital that Microsoft continues to expand on the $8.1 billion in revenue from the past fiscal year, opening its advantage in an area where the alpha players just can't compete.

3.)    If Windows 9 addresses the shortcomings of Windows 8, then Microsoft will regain consumer loyalty.

With major deficiencies, Windows 8 alienated Microsoft loyalists, and garnered almost no profit. It is up to Satya Nadella to admit that Windows 8 was a failure, and ensure that the upcoming Windows 9 release exceeds expectations. 

Investing in Microsoft
Microsoft shares are cheap, selling for a forward PE ratio of 13. While this in no means ensures growth, the risk in long term Microsoft investment is safe. One should not expect dynamic, upward rise in this stock, but a new CEO offers rooms for new perspective, and a renewed approach. The potential exists for Microsoft to not only maintain its superb financial record, but expand. This is a stock with little risk that over lengthy periods will pay dividends if CEO Nadella exceeds.

John Carenza has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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